How do I deal with a co-founder who hasn't contributed?


7

Question: How do I deal with a co-founder who came up with the idea, asked me to partner with him, and now hasn't done anything since we agreed on going into business together.

Background: My friend and I met through our fraternity while in our respective universities. We've been relatively close, and always had a desire to start our own business someday (the startup bug). The idea for the company we are working on right now was his, and he asked me to join him since he felt I would be the best person to work on it. I agreed initially to a 40/60 share (since he developed the idea).

He approached the idea to me in May 2011, right around the time when I was graduating from college. After that, all of June the only thing he did was join me on one meeting with an advisor where he didn't really interact at all. In July he went back to his college for summer school, but we decided we would keep working with each other remotely.

Neither one of us has any experience whatsoever of starting or even running a business, but I expected him to learn about it with me. Since we started, he has done absolutely nothing except talk to me on the phone once a month about what we should be doing (very basic information). Since June, I have:

  • Consulted with various mentors/advisors/Executives/CEOs in the industry we're targetting to get feedback on the product and gain insight about how to launch it.
  • Hired a developer to produce Version 1.0 of our product (albeit very basic) and provided him with all the sketches, flow-charts, info about what we were looking for. I have been asking my co-founder to contact him since I brought the programmer onto the project - three months and still nothing.
  • Conducted "market research" with relatives, friends, professionals who are involved with the industry, pitched the idea and gained feedback about what they would like to see in the product, how much they would be willing to pay, etc.
  • Talked to vendors who we would like to partner with in order to get our product to consumers.

Until last month, I was generally understanding of his situation that he was busy with classes and that he really couldn't put too much time into the project. However, I did not expect him to put 0-hours in it after 3 months.

I was wondering if there are other people on this forum who have had similar situations, and how they dealt with them? Some people have told me to drop him altogether because we haven't signed any contracts or registered the company. Personally, I don't want to "screw" him over, but at the same time I know he's holding me back by not being involved at all. I spoke to him about my concerns a month ago, after which he assured me he would be able to spend more time working after the beginning of September. No contact since. However, I scored a small personal victory by renegotiating to 50/50 (although I still don't think that's fair).

Should I create a co-founder vesting agreement? Where can I find templates?
Should I drop him altogether? Are there any legal implications?
Should I renegotiate for a higher percentage share?

Thank you for reading!

Co-Founder Legal

asked Sep 20 '11 at 07:23
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Saif Akhtar
53 points
  • Frankly, it doesn't sound like you have done much either. You hired a developer - but that seems to be about the extent of any real work either of you have done. I'd say just fold up the startup and concentrate on getting a real job. – Tim J 9 years ago
  • I appreciate the comment, but I can't say I agree with you. Granted, a lot of what I've done hasn't been extremely productive, but it's not as though I've been sitting around not doing anything. – Saif Akhtar 9 years ago
  • I read what you stated you did and again, it sounds like a lot of hot air and little actual work/productivity. I am not trying to be harsh, but it sounds like there is nothing here at all from either side. – Tim J 9 years ago

9 Answers


8

I am not a lawyer, but I've been through this exact same situation, and am passing on the tactics and advice I received from my lawyer. Why you can't cut and run at this point

I agree with many that he seems like "an idea guy" and will be "dead weight" and that you'd be better off pursuing this on your own (or recruiting another cofounder) if you're really passionate about it. The problem is, you might not have the freedom to.

In most jurisdictions in the United States, if you're operating in any sort of business arrangement without a formal structure or legal entity (ie, corporation, partnership, etc) then the law views your business entity as a "general partnership ". Under this structure, you have very strong fiduciary agreements which basically means that you can't do anything that isn't in your partner's best interest. Similarly, he can't do anything to screw you over either.

If you decide to cut him out of the business and take it on yourself, you'll have to sleep with one eye open forever in case he ever decides that he wants to take you to court over the business, even if you go on and incorporate it and build it out all by yourself. It would essentially be up to the judge to decide what's "fair", but it's very hard to make a convincing case that you did all the work yourself. People lose these kinds of cases every day.

Similarly, if you go to raise funding, while the VCs are conducting due dilligance, you'll have to tell them about your situation and they'll be extremely skittish. It might tank your deals.

Basically, he'll turn into a huge liability for you and the business.

So what can you do now?

If you really want to cut and run -- which I agree that you should -- you absolutely, 100% need to get him to agree to leave, and get it in writing. Have a lawyer draft something so that there are no loopholes.

It needs to say that he is assigning all of the businesses assets to you, including intellectual property. It needs to say that he forfeits all claims to the business. It needs to say that he won't misrepresent himself as an agent of your business going forward.

It should probably say that he can't publicly disparage the business and you might even throw in a non-compete clause.

But how do you get get him to agree to leave?

If you can't coax him into leaving the business on his own, the best way is to "buy him out". Since you don't have actual shares, there are no numbers to go by, so it'll take some negotiation. Sit down with him and tell him that you'd like to offer him a large sum of money for the idea and inspiration, and the right to carry it on yourself. Word this carefully to soften the blow and help your negotiation.

Then the two of you should hash out what you think the business is worth. Once you agree on that amount, offer to pay him half -- from your own personal savings -- and make sure that he knows that the exchange is:

  • he gets your money
  • you get his signature on the release contract.

If you make the release agreement really strict, he might ask for more money. You'll have to be flexible on this since you need his signature on that piece of paper. If he gets cold feet then you've done nothing but make bad blood -- and you're still stuck with him.

What if he still doesn't agree?

Then you need to stop working on the business. As hard as it may be for you, and as much as you've poured into it already, it's simply not worth it. If you slave away for months and years and make the next Facebook, he'll be eating half of your pie.

But more than that, an estranged and uncommitted business partner is a drain on you and your efforts. It'll drive you crazy and it will absolutely destroy your relationship. I've been in this situation and -- to this day -- I can't look my former roommate and friend in the eye.

It's a very messy situation and there's no easy or polite way out. Just keep reiterating that it's not personal, it's just business. Don't be hot-headed or you'll never reach an agreement. Best of luck.

answered Oct 19 '11 at 13:18
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Hartley Brody
1,317 points

8

I love these questions.

The good news: you haven't signed anything, so all code written is yours, you legally don't owe this fake co-founder anything.

The real question: do you really have the motivation to finish the startup by yourself, without the other founder? Are you willing to go fulltime on it? If yes, then ignore your old co-founder. Later on, when you incorporate (close to launch), ask him if he would like a small equity share as a gesture (less than 5%). His choice.

Do not keep this co-founder with you: if he hasn't worked on it for 3 months, then he is not passionate. He would be a drag on your progress. You'd be arguing and keeping him in the loop (a lot of work) for very little positive results.

These are facts (assuming what you said is true and fair). Your challenge: have the guts to kick your co-founder out and to stop pretending like there is no problem. There is a major problem and great entrepreneurs address problems head on. Will you?

answered Sep 20 '11 at 10:09
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Alain Raynaud
10,927 points
  • Thanks a lot for the advice. I actually called him yesterday and told him we were'nt partners anymore. I'm continuing with the project by myself at the moment because I believe in it's success, as do a lot of other people I have spoken to. – Saif Akhtar 9 years ago
  • "The good news: you haven't signed anything, so all code written is yours, you legally don't owe this fake co-founder anything." This advice is dangerously untrue. See my answer. – Hartley Brody 9 years ago
  • Hartley, your answer is even more accurate and exhaustive. – Alain Raynaud 9 years ago
  • Thanks. My experience was very eye-opening. I didn't consider that the estranged cofounder had rights too, and we had to reach an amicable agreement. – Hartley Brody 9 years ago

5

As Founder, I had a related situation - albeit with much better communication.

Our biz developed an online application and pushed the product off the shelf. I had a very talented CEO (I'll call him Logan) of another company approach me stating he thought our idea had "great potential" and after a couple of lengthy conversations, we decided to enter a Co-Founder Agreement. The plan was for Logan to vest into 30% + ownership over 4 years and contribute 10+ hours a week. We created a 90 day "cliff" to evaluate our working relationship before making the vesting official. This was key!

The runway to launch had already taken well over a year with considerable bootstrapping - we already had a membership base of 140+ users, but no revenue yet.

Long story short: Logan kicked ass for the first 45 days and really contributed lots of ideas and helped to execute some site changes. For the next 45 days he was basically a no-show because (thankfully for him), his biz took off so much he became swamped. He did not even have 10 minutes a week to give.

At 90 days we decided that indeed, he over-committed and unfortunately did not have the time to contribute consistently over the long haul. Co-Founder agreement ends, yet Logan remains on board as an Adviser with a 1% share of equity ownership.

Hope this helps...

Richard

answered Sep 21 '11 at 01:52
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Richard H.
175 points
  • Thanks Richard! Do you know where I could find examples of such agreements? I'm not very familiar with them. – Saif Akhtar 9 years ago
  • Hi Saif! We worked it out informally via email for the first 90 days cliff. If we had formalized a 4 year deal, I would have consulted with an attorney to draft a contract. I just did a quick search and found: http://blog.simeonov.com/2010/02/22/startup-founder-agreements/ Good luck! – Richard H. 9 years ago

5

It seems you are dealing with an "idea guy". Classic.

An idea has zero value. Nothing. Only execution counts. Somebody on board who refuses to work, but wants to get credit for the whole thing pretty much guarantees failure. Also, because he will not go through the path of execution with you, he will have no clue why it is important to pivot with the idea, when it comes to that. The initial idea always changes on the way. This is one reason the idea has no value.

The experience you gained could be used on a project that doesn't involve a totally useless person who is calling himself a founder. If I were you, I'd quit the project ASAP, and try to come up with a new idea myself, while looking for a better co-founder, possibly a technical one.

Here is something to read on the topic.

Good luck!

answered Sep 20 '11 at 08:59
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Mihaly Borbely
715 points
  • I agree. Thank you, Mihaly! As I mentioned in the comment above, I cut him loose yesterday and he and I are no longer partners. – Saif Akhtar 9 years ago

3

Tell him you want to "buy out" his portion of the business. And you'd be willing to pay him $100 per hour for all the long hours he's put in the past few . . . . oh wait.

Hmmmm, is it possible to write a check for $ 0.01?

answered Sep 20 '11 at 11:13
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Hondo69
309 points
  • lol that's a good way to put it – Henry The Hengineer 9 years ago
  • Haha love it. If only he was that stupid. – Saif Akhtar 9 years ago
  • Stupid or not, what can he show, according to the things you said? – Herr K 9 years ago
  • He really can't show anything, aside from maybe citing the one-hour meeting he initially participated in with me and a few short phone calls shared between each other about how to proceed. – Saif Akhtar 9 years ago

1

I agree with the 5% for idea suggestion above. At our start-up we have a number of partners helping at various levels (a couple of hours per month to full-time). We made a simple spreadsheet with various contributions (idea, business planning, engineering, marketing/sales, finance etc) and weighted % distributed across all of them. Idea had a small part (5%) of the total weight. We then used this simple spreadsheet to discuss the relative equity % among the main partners along with their level of involvement and depth in the field. It was easier to discuss because we had something tangible to work with. If you would like to keep your partner on-board, you could try something similar and see if you can reach a reasonable compromise. If not, it is time to move on without the partner or find a new idea.

answered Sep 20 '11 at 11:25
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Biju Kalissery
21 points
  • Thanks, Biju. I would love to hear more about the spreadsheet though if possible - I could definitely use it later on. – Saif Akhtar 9 years ago
  • I tried my co-founder equity calculator on your scenario and it got me 15% for the idea person. Sounds a bit high http://foundrs.com/calculator/index.phpAlain Raynaud 9 years ago

1

I think Alain has a good grasp on this.

Alternatively, one thing you could do is get the company registered, and put both of you on vesting schedules. This basically gets you out of having a nasty confrontation.
You vest your shares in the company over a couple years, and base them on milestones. When your partner doesn't meet the milestones, he looses the rest of his share in the company, and you go forward alone, but with a largest share of the company. There can't be hurt feelings, because your partner didn't live up to the deal. It makes everything very black and white, and fair on all accounts.

However, the up side of this is that if he does get into gear, and starts contributing, you still end up with the same equity you have now, and you still have a partner that will be working hard. I always prefer to work with at least one other person when starting a business, so I can't really tell you it's better off alone, having another opinion on things is pretty invaluable.

answered Sep 21 '11 at 03:44
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Bwasson
1,162 points
  • Thanks bwasson. Do you know where I could find examples of vesting agreements? I'm not very familiar with them. – Saif Akhtar 9 years ago
  • Not off hand. I leave anything having to do with equity to my lawyers to deal with. Too much at stake for me to screw it up. – Bwasson 9 years ago

0

Actually, Hartley is pretty close to accurate, but not quite. You can't just stop working on it. If you do, then YOU have legal liability as a fiduciary (aka "owner") and he could sue you for breach of fiduciary duty unless you give him notice of your intent to cease the business.

Walking away is NEVER the right thing to do, even as an employee. Make sure you outline your concerns in writing, have them reviewed by a competent attorney in your state, and then have your partner served so that you have legal proof that he received the documents.

You don't have to file a lawsuit, but you do have to protect yourself. In my opinion, the best route here is to go the "let's get an agreement in place" route, and have in that agreement the responsibilities and that equity is tied to participation.

If that fails, notice them that you're leaving and turn your shares into the company (if any exist).

answered Jan 1 '13 at 04:49
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Randy
1 point

0

I've worked with someone exactly like this. He and I were very close friends. We starting up a company together and as time went on, he had little to do but still never did it. There wasn't the 'idea issue' that you seem to have but anyone who thinks an idea is work a lot of money need a dose of reality.

If you don't want to 'screw him over' I think that is very admirable of you. We should always keep things balanced. However, he's not keeping things balanced at all. The promise of more effort is a joke - he is either completely sold on making things happen or he is not. If he's not, then get away from him: at best he'll just take a cut of your added value; at worst, he'll destroy the business.

I don't know about buying him out or cutting him out (buy starting your own thing which does the same thing). There are a million ideas out there. Find a better partner and move forward with that. Just tell the guy that you're disappointed with the progress of the company and don't want to move forward with the idea (since part of the idea is moving forward with him).

Good luck to you!

answered Sep 20 '11 at 13:30
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John
1,194 points
  • Thanks John. As mentioned in the previous comments, I already cut him out. Now he starts calling haha. – Saif Akhtar 9 years ago

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